The Canadian Tax Resource Blog has a host of personal finance and tax related articles on a variety of topics. The Tax and Personal Finance Guide is a source book for information and is organized around major topics, such as RRSP’s, TFSA’s, financial planning, and small business.

This guide contains most of the major sections of this site, but is not exhaustive. If you don’t see what you are looking for, try the search box in the right hand column.

If you have a suggestion for an article or topic, please feel free to write, or leave a comment below.

Guide & Articles

The Ultimate RRSP Guide- Registered Retirement Savings Plans (RRSP’s) have been a popular way for Canadians to save for their retirement since 1957. The RRSP guide, contains a number of articles on a variety of topics to answer your RRSP questions.

TFSA Articles – The Tax Free Savings Account (TFSA) was launched in 2009 as a tax-free way to save for their retirement or for other purposes. Over the last few years, many questions have been asked about the TFSA. Here are some of the most popular:

• How do TFSA contributions work? – There are limit to how much you can contribute to a TFSA. Knowing the rules can help save you in penalty taxes.
• What investments can I hold in my TFSA? – The investments you can hold in your TFSA are the same as those you can hold in your RRSP. This article has the list!
• The TFSA & estate planning – What happens to your TFSA when you die? A little simple planning can help reduce the tax bill for your loved ones.

Income Splitting Guide – Families have an opportunity to lower their overall income tax bill by shifting income from one family member to another. The strategy, know as income splitting, is effective: But you must know the rules and pitfalls. This guide has everything you need to know.

Personal Financial Planning – How do you create your financial plan and build your wealth? The personal financial planning section of CTR contains a number of articles to help you. If you want to read more about personal finance tips, check out the personal finance section.

Real Estate Guide – Should you invest in real estate? What happens if you sell your home? What happens if you rent? The real estate guide contains all of our articles about real estate including your family home, rental property and vacation properties.

Small Business Articles – Topics for business owners. This section contains information on shareholder loans, corporations, HST, tax deductions and more.

Investment Tax Guide – Taxes are an important consideration when you make investment decisions but should be the only driving factor that affects your investment decision. The investment guide answers many of your tax questions.

Estate Planning – Making sure your affairs are in order for your loved one is important. No one wants to leave a mess behind after they die, and our estate planning section can show you some of the pitfalls to avoid.

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The onset of financial trouble is some times obvious: The loss of a job, fire, or accidents can put financial strain on the best of us. In these cases the cause is well known and while we may know that increasing income or paying down debt is the obvious solution, implementing is not always possible. However, there is a number of warning signs that can appear that we may not recognize and are self inflicted.

Here is a list of the early signs you are heading for financial trouble, signs things are getting more serious and finally signs that you may be past the point of no return.

Early Signs Of Financial Trouble

• Lack Of Financial Goals.
• Lack Of A Budget Or Cash Flow Plan.
• No Idea How Much Money You Owe Or Debts You Have.
• Spending Money On Things That Are Not Necessities Instead Of Paying The Bills.
• Using Credit Cards To Pay For Necessities Or Because You Do Not Have The Cash.
• Misrepresenting Purchases To Your Spouse.
• Avoiding Discussing Finances With Your Spouse.
• Credit Cards Are Maxed Out Or At Their Limits.
• Borrowing Money To Pay Bills And/Or Other Debt While Using Available Credit.
• Choosing The Longest Possible Payment Period On Loans.
• Only Able To Make The Minimum Payments On Your Credit Cards.
• Repeatedly Using Savings To Pay Regular Bills.
• Little Or No Savings.
• Lack Of Or Inadequately Funded Retirement Account.

You Financial Situation Is Getting More Serious

• You’ve Been Turned Down For A Loan.
• You Are Afraid To Open Your Mail.
• You Are Taking Cash Advances To Pay Another Credit Card.
• You Bounce Checks And Overdraw Your Bank Account.
• Paying Bills Late Or Missing Payments Altogether.
• Taking Home Equity Loans To Pay Credit Card Debt.

Critical Warning Signs Of Financial Collapse

• Excessive Debt Payments (More Than 20% Of Take-Home-Pay (Excluding Mortgage Or Rent).
• You Pay Your Bills Late OR Paid When You Can And Not When They’re Due.
• Mail Is Not Opened If It Looks Like It Could Be A Bill Or A Collection Notice.
• Getting Calls From Creditors.
• Depending On Others To Help You Out.
• Using Payday Loans.
• Garnished Wages.
• Services To Your Home Have Been Cut Off.

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Have you considered withdrawing from your RRSP or other retirement savings plans to pay down your debts? Have you thought of using your RRSP to take a vacation or as a ready source of cash?

Before you even consider withdrawing from your RRSP, you should get you credit report from Free Credit Reports Canada.

Withdrawing from your RRSP early can have some unintended tax consequences. There may be alternatives to using your regular or self-directed RRSP for debt reduction or other ways to access cash you may need.

RRSP Withdrawals & Income Taxes

The financial institution that holds your RRSP is required under to withhold a portion of the withdrawal for income tax. The RRSP withholding taxes are as follows:

RRSP Withholding Taxes

In Quebec, the withholding rate is ½ of the percentages in this table.

For example, if you have $20,000 of debt, you would need to withdraw at least $28,600 from your RRSP ($28,600 – 30% = $20,020).

Although, you may be thinking that you could reduce the amount of withholding tax to 10% by doing four $5,000 withdrawals, you may be doing yourself more harm than good.

The withdrawals from your RRSP are added to your taxable income and the withholding tax may not be enough to offset the extra tax that is actually due on the withdrawal. You could be hit with a tax bill at the end of the year!

Also note that some financial institutions are looking at clients who have made multiple RRSP withdrawals and may require the higher withholding rate be applied!

An Example

Jim earns $40,000 and needs $20,000 to pay off his debt.

If Jim does a lump sum withdrawal of $28,600 he will receive $20,000 to pay off his debt.

At the end of the year, Jim’s employer would have remitted $6,400 of tax for his employment income and the bank would have withheld $8,600 for his withdrawal.

His taxable income would be $68,600 and would still owe $360 to the government as a result of the withdrawal.

On the other hand, if Jim decided to do four withdrawals of $5,600 each, the total tax withheld would only be $2,200. At the end of the year Jim would owe the government an additional $5,300!

Are There Alternatives To Withdrawing From Your RRSP?

I am of the opinion that an RRSP you should never withdraw from your RRSP to pay down personal debt! Think about the following alternatives to withdrawing from your RRSP:

1. RRSPs & RRIFs are Creditor Protected. If you find yourself unable to pay your creditors, you may be facing bankruptcy. Know that if you go into bankruptcy, RRSP contributions made more than 2 years prior to bankruptcy cannot be touched by your creditors.
2. Consolidation Loans. If you still have good credit and are finding that your debt payments are getting out of control, consider consolidating your debts into a single payment. The single payment should be lower than your combined payments and the term of the loan is fixed (so there is an end in sight). If you consolidate, take steps to eliminate your credit cards and other lines of credit so you don’t find yourself in this situation again.
3. Consumer Proposal To Creditors. If you are unable to get a consolidation loan, you should consider seeking the help of a consumer credit counsellor and make a proposal to creditors. The proposal can reduce the amount you pay and avoids bankruptcy. However, a consumer proposal will show on your credit report and affect your credit rating for 3 years.
4.  Bankruptcy is a process of eliminating your debts. With bankruptcy personal assets may be sold to satisfy all or some of your debts. Contributions made your RRSPs more than two years ago will be exempt from your bankruptcy and certain other personal assets (varied by province).
5. RRSP Mortgage: If you are thinking of paying down your mortgage with your RRSP, consider an RRSP mortgage instead. The RRSP mortgage allows you to hold your own mortgage inside of your RRSP. In the end you are paying off yourself!
6. Education Withdrawals You can withdraw under the Life Long Learning Plan (LLP) tax free as long as you pay it back later on.

If you are considering cashing out your RRSP to pay down your debts, please contact us for a custom analysis of your situation.

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Creating a net worth statement and planning and creating your cash flow budget are important cornerstones of you financial plan. However, it’s important to include savings for things such as retirement, home ownership, and major purchases.

The net worth statement and cash budget are starting points but are not themselves the goal but rather documents to help you achieve your goals. They are used to help convert aspirations of retirement, home ownership, and vacations into clearly stated objectives.

Set Your Overall Savings Goal

Your savings plan should start with general savings strategies that increase your household net worth: increase your assets (i.e. increase your savings and investments), decrease your debts, or some combination of these two options. Thus you should consider your savings plan in both debt reduction and asset accumulation.

You can use a savings goal setting worksheet to help you identify how much you need to save to realize your goals and helps you commit a portion of your income to achieve these goals.

Set Your Overall Savings Goal

By spiderpop via Flickr

Your savings plan should start with savings strategies that increase your household net worth: increase your assets (i.e. increase your savings and investments), decrease your debts, or some combination of these two options. Thus you should consider your savings plan in both debt reduction and asset accumulation.

You can use a savings goal setting worksheet to help you identify how much you need to save to realize your goals and helps you commit a portion of your income to achieve these goals.

Example Savings Goal Setting Worksheet

*Future value of an annuity
$5,000 = PAYMENT x [ ( 1 + 3.5% / 12 )¹² - 1 ] / 0.035 / 12
PAYMENT = $410.02

In this example, assume you want to take a short vacation 12 months from now and you estimate the cost will be $5,000. If you place your money in a short term savings account paying 3.5% (after-tax), you will need to save $410 per month to save enough money to go on vacation.

If you complete the worksheet for all of your anticipated future spending and investments, you’ll have an idea of how much you will need to save. Some common items that would appear on the worksheet include:

• Down payment for a home
• Appliances
• Retirement
• Education
• Vacations
• Major appliances

What Happens If My Savings Aren’t Enough?

If your savings are enough, you need to make some changes. Even if your savings are enough, you can still make changes to your plan to better position your self in the future.

PAY YOURSELF FIRST! Treat your savings as a fixed expense and ensure your own financial security. This will help you avoid going into debt if there is an unforeseen future expense (such as a major appliance replacement). Paying yourself first and saving will also help you address cash flow problems identified in your cash flow plan.

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Measuring your net worth (what you own less what you owe) is a key measure of your financial health and progress towards your goals. Along with your cash flow plan (or budget) it is the starting point of your financial plan.

Here are four quick ways to increase your net worth.

1.> Improve Your Investment Returns

• If you’re looking for more income to invest, switch some of your equity positions to preferred shares, bonds, or higher yield stocks. This will increase your cash flow.
• Increase your positions in common stock. You also increase the amount of risk you assume, but the returns may be higher. Given the current condition of the stock markets, buying now is an excellent opportunity to pick up shares in good companies.

2.> Invest More of Your Discretionary Income

• The adage is “pay yourself first” and by fixing your monthly or weekly savings and investment contributions will systematically increase your household net worth.
• If you’re already investing 10% of your income now, you probably don’t even miss it any more and have adapted to getting by with a little less.
• If you want to get aggressive and think you can meet your regular obligations, try increasing your systematic savings to say 11% or 12%.

3.> Minimize your taxes

• If there is an opportunity to reduce the amount of tax you have to pay, take advantage of it (legally of course).
• Take advantage of every tax credit, deduction, or other opportunity available.

4.> Reduce Your Debt

• Your debt is one whole side of your household net worth. By focussing on debt reduction you can significantly improve your net worth and improve your cash flow. It’s a snowball effect: The more you pay off the more money you have to pay off more. Get fanatic about it.

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The cornerstone of your financial plan is your net worth statement. It is the starting point you use to measure your progress. If you don’t understand where you’ve started it’s hard to measure if you have been successful. It is like being on a ship without a keel: Your moving but you don’t know if it’s forward or in circles.

To illustrate this point, imagine you are planning an exotic vacation. Questions you want to ask yourself are:

• When will the vacation start?
• Where do I want to go?
• What type of vacation do I want?
• How much can I afford to spend on the vacation?

When you create your financial plan you need to ask yourself very similar questions. You’ll need to establish where you are now, where you want to be in the future, and what financial resources you will have when you get there.

By woody1778a via Flickr

Starting Your Financial Plan

Measuring net worth is like taking a picture: It is a snapshot of a point in time. The net worth statement is a snapshot of your wealth at a point of time and is used to measure your progress.

There are four reasons why you should measure your net worth:

• To establish financial discipline
• To create a strategy to achieve your goals
• To measure progress towards your goals
• To feel financially secure about your future

Use the statement to establish growth targets for your net worth. Often net worth will increase by paying down your debts or increasing your savings.

Calculating Household Net Worth

Net worth is the total fair market valueof all of your assets (house, stocks, bonds, mutual funds, GICs) less what you owe (mortgage, loans, credit cards).  (i.e. what you owe).

Getting Started With Your net Worth?

To start, pul together all of your financial records, including:

• Latest tax records
• Bank statements
• Credit card information
• Itemized living expenses
• Brokerage statements
• Mutual fund records
• Mortgage documents and statements
• RRSP & pension records
• Loan repayment schedules
• Insurance policies
• Market value of any personal property

This list may appear daunting and is not by any means comprehensive.

What Does The Net Worth Statement Look Like?

Here is a sample net worth statement.

NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES

Now Measuring Your Net Worth Success

Your net worth at the end of the year should be compared to the end of the previous of the year.

• Was the growth rate expected?
• Do you need to take steps to accelerate the growth rate or maintain it?
• Is your net worth negative? Perhaps you need to get aggressive with debt reduction strategies.
• Consider other ways to grow your net worth.

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One question that I am often asked is whether it makes more sense to invest or pay off loans and other debt. The general answer to this question is to pay off your debts first because you will pay more in interest on your debts than you will earn on investments. A variation on this is to pay of non-deductible interest first. However, these “general answers” do not necessarily hold true in all cases.

The actual answer depends on the rate of interest you pay on the debt after tax and the after tax rate of return on your investments. Now it is important to note that in Canada that the interest you pay on debt is only deductible if the borrowed funds were used to earn income. Therefore, investment loans will have a lower after tax interest rate as compared to interest on personal loans or credit cards.

The general rule of thumb is must then be modified: If you can earn a higher, after tax return on your investments than the after-tax interest rate on your debt, then you should invest. Otherwise pay off your debts first.

The reason is simple. Your objective should be to pay the least amount of interest between the two alternatives. The additional interest you earn on the investment can be used to reduce your debt.

Consider the following:

Note: You must convert the interest rates to an effective annual rate to ensure they are comparable.

If your mortgage rate is 5.25% and you are earning 8% on your investments annually, your effective annual rates on each are:

The investment income is subject to tax at your marginal tax rate.

If your marginal tax rate is 35%, then the after tax investment income is 4.4% and you are better off paying down your mortgage rather than investing.

However, if your marginal tax rate is 25%, then the after tax investment income is 6.0% and you are investing.

Another Factor To Consider
One other factor to consider is your overall level of debt and your ability to service your debt. If you have excessive amounts of debt or if you are not able to make your monthly payments and make all of your other commitments (rent, groceries, entertainment etc.) then you should concentrate on reducing your debt anyway.

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This discussion concerns joint accounts in all provinces except Quebec. The rules in Quebec are different than in the rest of Canada and the information contained in this article should be discussed with your tax advisor.

Why Have Joint Bank Accounts and Brokerage Accounts?

There are two common reasons for establishing joint accounts.

First is to create an easily administrative account accessible to both parties.
The second reason is as a tool to reduce probate taxes upon the death of one of the accountholders.

Issues and Pitfalls of Joint Accounts & Property

There may be negative consequences of transferring assets to a joint account that is with someone other than your spouse.

• Capital gains may be triggered if the assets are transferred to an account held with someone other than your spouse.
• You may lose control over the property and decisions may no longer be made without the consent of the other party.
• If one of the account holders becomes bankrupt the joint account will form part of the bankruptcy.
• If you as a parent have a joint account with one child but not the others a conflict may arise as the joint owner child becomes the owner of the assets.
• If there is a breakdown in the marriage an account held joint with an adult child may be divided in the divorce.
• The principal residence exemption may be compromised.

Probate & Joint Accounts

In all provinces except Quebec a probate tax may be levied on the value of the estate. This tax may be reduced or eliminated through the establishment of joint ownership with the right of survivorship.
Upon death of one of the holders, the ownership fully passes to the surviving owner. However, there is typically a deemed disposition for tax purposes and the estate would be responsible for any capital gain or income on its proportional ownership of the assets.
The only exception would be if the account is held jointly with your spouse, in which case there is no capital gain or loss upon transfer.

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We all have desires and goals we want to achieve. Saving for retirement, children’s education or buying a home is attainable by most of us. However, at the end of the month you may wonder where your money went and how you will ever reach your goals.

Regardless of your stage in life, income, or wealth, a financial plan helps you clarify and prioritize your goals and set objectives for reaching your goals.

These six simple steps will point you in the right direction.

Step 1 – Track Your Net Worth
Step 2 – Track and Manage Cash Flows
Step 3 – Establish Your Goals
Step 4 – Establish a Savings and Investment Plan
Step 5 – Cover Your Risks
Step 6 – Review Your Plan Annually

Step 1 – Track Your Net Worth

The net worth statement provides a picture of your financial position at a point in time. A net worth statement help you track your financial progress and can be used to establish a strategy to improve your goals and feel secure.

Your net worth is the total of what you own less what you owe. Your net worth statement helps you determine what your assets are and quickly you can access cash. A review of your liabilities will show how debt affects your worth and whether you have sufficient insurance coverage. The statement helps you identify problem areas and take steps to correct those problems.

Your net worth should be re-calculated annually and compared to the prior year if it is to provide any value.

Your net worth should increase annually. If your net worth is negative, then you must take steps to reduce debt, increase assets, increase investment income or revise your goals accordingly.

Step 2 -Track and Manage Cash Flows

Your net worth statement looks at a single period in time while your cash flow statement measures a period of time. The only way net worth can grow is if cash flows are positive or you have savings. If cash outflows exceed inflows, then action must be taken to correct the situation either be increasing income or reducing expenses.

Tips to improve cash flow:

1. Reduce expenses: Eliminate discretionary items to ensure there is a workable long-term plan. A budget worksheet or budget software can help you understand your expenses.
2. Restructure debt: Take a term loan, line of credit, or refinance your home and close un-needed high interest consumer credit card accounts.
3. Defer purchases of non-income producing assets: Defer the acquisition of non-income or negative cash flow asset acquisitions. Reduce, restructure, defer. This is the key is to reduce cash outflow and improve cash inflow.

The cash flow statement is used as a planning tool to look for opportunities to improve net worth.

Step 3 – Establish your Goals

The overall objective is to establish what you want and how you are going to get there.

What are your goals?

• Buy a home
• Take an exotic cruise
• Save for your retirement or you child’s education
• Buy a vacation home
• Purchase a pool
• Buy an exotic car

Sit down with your partner and commit to paper a list of what you want to achieve. Categorize short-term and long-term goals and rank them in order of priority. You may need to make revisions allowing more time for some things and less time for others. Look at your cash flow statement and flexible expenses to determine if expenses can be reduced or eliminated. Look at your investment and determine if repositioning assets can enhance investment income.

Step 4 – Establish a savings and investment plan

From your cash flow statement you will and goals you will see how much you will need to achieve your goals. It may be necessary to revise your budget and make adjustments to increase income or reduce expenses.

Any savings and investment plan should have the following elements:

• The goals must be realistic and attainable.
• Pay yourself first. Set up an automatic rep-authorized plan to divert funds into your savings.
• Avoid the use of consumer debt and avoid spending more than you make.

The reward for a disciplined and methodical approach to the plan is the attainment of your goal!

Step 5 – Cover your risks

Events occur in life that are uncontrollable are those things that can affect us financially. These include loss of employment, accidents, property damage, health and illness, or death. To effectively manage these risks:

Establish an emergency fund of approximately three months of income. A line of credit can be used rather than short-term investments that have lower rates of return. If unused, the line of credit costs nothing and your savings can remain invested in higher yielding investments.

Any risks that cannot be covered personally must be covered by passing the risk on to a third party such as an insurance company. The level of insurance needed depends on your financial situation.

Insurance needs analysis varies based on the type of risk and policies available.

Step 6 – Review Your Plan Annually

Situations change and you should review and update your plan annually to see how far you have come. Did your net worth meet it target? Were you able to meet all of your goals? What circumstances are different?

Review, update and revise your net worth statement, cash flow statement, goals, and risks annually. Make revisions as required.

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The Globe and Mail reported yesterday that MBNA has sent notices to all of its clients announcing changes to the way in which the minimum credit card payments will be determined. Moreover, the other credit card companies are expected to follow suit soon in order to comply with new federal regulations designed to create transparency.

According to the new rules, minimum credit card payments should increase. MBNA provides an example where a minimum payment of $185 would increase 66% to $307. The change in the minimum payment formula will ultimately reduce interest charges paid by consumers.

The new formula will take effect in August 2010.

Prepare Yourself For The Change

For those of us who pay our bills in full or make significant monthly payments above the minimum payment should not be adversely affected. Those Canadians who currently struggle making minimum monthly payments are facing tough times.

Now may be the time to look for a consolidation loan and get rid of your existing credit cards. If a consolidation loan is not available, you may have to seek a consumer proposal or at worst bankruptcy.

Tips To Reduce Credit Card Problems

While credit cards provide an excellent way to avoid bank fees by using the float, if not paid promptly, they can be expensive. Here are a few tips to avoid credit card problems:

1. Only have one credit card,
2. Pay your balance in full every month,
3. Avoid credit cards with annual fees,
4. If you have to carry a balance, seek out low interest credit cards,
5. Avoid rewards cards or points cards. These features often come at an additional cost by way of a higher annual fee.

To find out more about how to avoid credit card problems read Tips To Reduce Credit Card Debt Problems.

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